Real estate investors in Dubai are opting to develop land plots rather than wait for a return to lucrative sales profits in a market no longer dominated by speculators.
This significant market shift was highlighted at Cityscape Global today by Firas Al Msaddi, CEO of fäm Properties, one of Dubai’s top real estate brokerages.
“Between 2010 and 2013 in prime Dubai areas, trading plots was one of the most lucrative real estate investments,” said Al Msaddi. “But in the past three years, plot prices reached optimum level, killing opportunities to buy and sell for profit in the short and medium term.
“As re-sale transactions dropped drastically, more and more plot owners have taken the decision to develop their land, many encouraged by the offer of completed infrastructure in prime areas of such as Downtown, Business Bay and Dubai Marina.”
What the numbers show
Figures from the Dubai Statistics Center show a major increase in the number of new multi-storey building permits issued over the past three years – 1,368 compared with just 674 between 2010 and 2013.
“Plot owners opting to develop a project on their land are finding that many banks have a good appetite to finance construction, provided the plot is fully paid up and there are healthy financials,” Al Msaddi said.
“They have to keep in mind that profit margin is low should they to inject full equity and sell when ready. But there is a decent ROI (return on investment) and IRR (internal rate of return) to be generated, if they plan their bank funding and off-plan sales well,” he added.
Old times were different
At the peak of the boom in land trading before 2014, prime areas such as Downtown, Business Bay and Dubai Marina were the most lucrative. Al Msaddi says G+18++ plots launched by Dubai Properties in Downtown during 2010-11 for AED195 per sqft climbed to AED240 per sqft on GFA (gross floor area). The same plots also fetched AED350-400 per sqft in the secondary market.
“But few investors were purchasing plots to develop, and short-term price increase for plots attracted many aiming to re-sell for a decent profit margin,” said Al Msaddi.
The new real
The change of investment strategy by plot owners reflects a broader shift away from speculation in Dubai real estate, he added.
Data from the Dubai Land Department shows off-plan property sales increased in recent years, equalling those of ready property transactions for the first 2Q of this year.
“While initial launch phase sales by speculators have fallen, there has been a significant increase in pre-handover sales within six to nine months of completion when buyers are medium to long-term investors or end users,” said Al Msaddi. “It’s no longer a market dominated by speculators looking to buy and flip properties for quick profits.”
The background for this change was that between 2012 and late 2014 launch phase investors were able to buy off-plan and sell at a profit within 12 months.
“But from early 2015, developers began launching new phases and sub-projects in existing developments, offering the same rates with more attractive payment plans,” explained Msaddi. “This meant that investors who had bought the old stock with the original, less attractive, payment plans, found it more difficult to sell at a profit in the short term.
“As short-term opportunities shrank, investors shifted their strategy to medium and long-term. So, the growing numbers of today’s off-plan buyers are end users or investors looking to rent out their units once the project is ready, or wait for the right time to sell,” he concluded.